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Candlesticks

June 12, 2017

Friday’s tech savaging continues today. The NASDAQ has already dropped almost 5% from high to low in just two days.

The size of the move on Friday combined with the heavy volume suggest that this is a major high for the index. We are seeing other sectors, such as consumer staples and utilities rallying sharply as investors move from tech to safe havens.

I liquidated nearly all my tech position by Monday and will wait until I think of investing in this sector soon from a position perspective.

But, as a swing trader, I’ll be buying Facebook (FB) if it closes higher on the day. Right now, as I write this, we are seeing an initial plunge but now FB is rallying sharply. This type of price action usually leads to a pop to the upside that is very traceable and I look to make some money. I’ll be taking profits of about $4 per share at about 151.00.

March 13, 2013

While I typically write forward-looking commentary and analysis, I wanted to write a piece that showed the anatomy of a trade in 5 simple steps, essentially tying together all the various aspects of the education that I teach.

A trader friend recently took my Swing Trade Pro course - and loved it! As a matter of fact, he gave me perhaps the best testimonial I could've gotten for the course - "Frank, this is really good sh*t!" (Hi Tom!)

He told me about a great trade he had taken in Taser International ($TASR), and asked me to take a look. After checking it out, I thought it would be a great idea to share with you how my approach played out in this stock - in 5 simple steps.

Step 1: Identify the Setup

In the daily chart of TASR, you see a very distinct pattern that had formed - the Inside Day pattern. This pattern is a favorite among swing traders because it has the ability to spark some of the best breakouts in the market.

The key to this setup is to be patient and wait for the right "opening relationship". That is, just because an Inside Day pattern has formed doesn't mean automatic profits. You have to wait for price to break out from the pattern in a manner that provides the best odds for success.

In this case, price opened the next session with a gap up, out of range and out of value. This is the most bullish opening relationship you could ask for. Any time price gaps out of the prior day's price range, this is a clear indication that market sentiment has shifted overnight and initiative participants are eager to begin pushing price to new value.

Now that we have a great setup with a great opening relationship, let's move to Step 2.

Step 2: Identify the Entry

There are many ways to enter a trade. I teach 3 primary techniques for executing entries, along with many hybrids for identifying trade location - easily totaling 10 or more methods that I use interchangeably given the specific scenario.

In this trade example, I'll identify three ways that I teach to enter a trade.

1. Retest Entry: When the market gaps out of range and value, I watch the first 15-minute bar of the day to see how it responds after the gap. If price maintains gap integrity and closes bullishly, then I set a Buy Limit order at the center of the 15-minute candlestick. In this case, the Buy Limit is set to $7.30, which would have triggered during four of the next five 15-minute bars.

This method gets you into the trade 2 ticks from the low after you set the entry. Not bad.

2. OR-30 Breakout: If you happen to miss the Retest Entry, it's then time to try for a 30-minute Opening Range breakout entry. The idea here is to Buy a breakout from the opening 30-minute range, which is done by setting a Stop Market order to Buy a tick or two above the 30-minute opening high price. This technique gets you into the trade at $7.36.

3. OR-30 Bounce: If you happen to miss the entries for both the Retest and OR Breakout techniques, don't fret. Instead, use the OR-30 Bounce technique. Place an Ambush Buy Limit back at the opening range high price at $7.35 and wait to be filled.

Oftentimes, price will return to retest a breakout level before resuming in the original direction. When this occurs, the traders that were left behind will now board the train in this zone, thereby adding additional fuel to the up move.

This technique gets you into the trade at $7.35

Step 3: Identify the Trade Management

Here's the deal, a properly outlined trade management approach is a MUST. You must know EXACTLY what you will do when you trigger a trade. Will you use profit targets? How about trailing stops? How are you calculating your fixed loss stop? Are you scaling out of the trade? These questions and more must be answered BEFORE you enter a trade.

As a professional trader, you must have a toolkit that includes all the various approaches that you have at your disposal. All you have to decide is which to use for this specific trade. The trade will dictate your approach.

Let's start with the stop. I'm a fan of using Average Daily Range (ADR) in my trading - for both stops and targets. For stops, it's as easy as calculating the average daily range over the last 10 periods, and then cutting that value in half. This is your stop amount.

For TASR, the 10-day ADR was $0.57 on the day of the setup (Feb 27), which means TASR moves 57 ticks per day on average. Cutting this value in half gives us a stop amount of $0.28, which is half the daily range.

For targets, you can use a variety of approaches. I like to trade to profit targets because I can calculate targets with a high degree of accuracy using my ADR Method (RT Edition and SWING Edition).

For a standard swing trade, I'll calculate a 5-day ADR target. In the case of TASR, the average 5-day MDR (Multiple Day Range) on the day of the setup was $1.405, which means during the most recent period of time, TASR moved on average $1.40 every 5 days.

Since price doesn't always move in exact averages (if ever), I like to use 75% of the average MDR, which is $1.05. Therefore, we project $1.05 higher from the prior day's low price of $6.93 in order to get our 5-day profit target of $7.98.

We'll play to this target.

Step 4: Execute the Trade

Here's the fun part. You've identified the setup, identified the entry techniques that you can use for this particular setup, and you've already identified the stop and profit target that you'll use.

All that's left is to execute your plan. Plan the trade; trade the plan.

This is when you must approach trading without emotion; like a machine. You are just executing a plan. That's all. Nothing more, nothing less.

By approaching trading in this manner, you are virtually eliminating emotion. Furthermore, you are approaching trading like a business and merely executing the task at hand.

Step 5: Sit on Your Hands

Once you've triggered your entry, and set your stop and profit target…DON'T TOUCH ANYTHING! Once money is on the line, clear thinking happens to go out the window. That's why you plan the trade ahead of time when you are thinking at your clearest.

Any tinkering with the trade that this point is a recipe for a botched trade.

The Final Tally

As it turns out, the profit target of $7.98 was reached in exactly 5 days, giving you a solid trade with great trade location, well-defined risk, and a high-probability target. Not bad for 5 days of "work".

While every trade in the market is different, having a proven method for attacking the market is a must. Every method and technique used above is one of a series of techniques, concepts, and methods that I teach at PivotBoss.

If you liked this post, let me know in the comments section below. If there's enough interest, I'll make this type of post a regular at PivotBoss.

February 27, 2013

Jacobs Engineering Group, Inc. has enjoyed a nice four-month bull trend, and could be on the verge of another surge higher. Here's more…

Confluence

The daily chart of JEC shows price has trended steadily higher the last four months, gaining 30% since the beginning of November. The recent pull-back from the 52-week high may prove to be a very nice swing buying opportunity.

As a matter of fact, the pull-back from recent highs led price to drop right into a solid source of support via 3-way confluence.

Tuesday's trading activity led to the formation of a bullish reversal candlestick pattern that developed right at the monthly pivot range (pink lines), quarterly VWAP (blue dotted line), and within the trigger zone of "stacked & sloped" pivot-based moving averages (grey lines).

This trifecta of support could lead to a solid 3- to 5-day advance in the days ahead, and potentially more.

The Game Plan

Use the Retest Entry technique to trigger a Long position at $47.40 within the next day or two, using a 1/2 ADR stop at $46.80, and targets at 48.94, 49.13, and 49.85.

Keep in mind, if price breaks (and closes below) the monthly pivot range at 46.36, the trade is over, as it no longer satisfies the conditions of a pull-back swing trading opportunity.

Heating Oil Update

my last blog post, I wrote about Heating Oil and its potential to move back toward 3.106. This target was reached in 6 days, and continues to push farther.

February 13, 2013

Heating Oil futures have been on the move, but now the commodity is sitting just below significant resistance. Here's more…

Resistance

The daily chart of Heating Oil futures shows price has experienced a solid run of strength over the last four weeks, rallying from a low of 2.9858 in January to a recent high of 3.2575 in February.

However, HO has run right into a major wall of resistance at 3.26, which has been a significant zone since September of last year. Each of the two prior attempts at 3.26 has resulted in extremely bearish reversals, so we'll want to watch how price reacts to this level this time around.

Double Inside Day

The daily chart also shows that HO has formed a Double Inside Day setup. This pattern forms when the current day's price range falls within the prior day's price range, and the price range from two days ago falls inside the range from three days back.

In essence, this pattern can spark significant breakouts. Watch the price range from Tuesday's trading for a potential breakout ahead - 3.2198 down, and 3.2486 up.

Floor Pivots

Price is currently sitting right at the monthly R2 Floor pivot, which is significant. On average, price usually closes within the R2/S2 price band around 70 or 80% of the time.

As a matter of fact, HO has only tested R2 four times since the beginning of 2012, and has only once closed above it during this time.

Therefore, we could see a reversion to the mean type of move ahead, whereby price drops back toward R1, and potentially as low as the top of the pivot range at around 3.106.

IF price happens to break beyond the 3.26 resistance level, there is a two-year resistance level above at 3.32, which should be an upside target to watch.

January 28, 2013

The E-Mini S&P 400 has developed one of my favorite trading setups, which means this E-Mini could be ready for a significant breakout opportunity.

Inside Value Setup

The 15-minute chart of the E-Mini S&P 400 (EMDH3) shows an Inside Value relationship has developed, which usually leads to a solid breakout in the upcoming session.

The Inside Value setup occurs when the current day's Value Area (the dotted lines) develops inside the prior day's Value Area (blue horizontal lines). Essentially, this setup shows that price is coiling, and could be due for a breakout very soon, likely in the upcoming trading day.

Without a doubt, this setup contributes perhaps the majority of my biggest trades, which is why I featured it in my book, Secrets of a Pivot Boss.

Keep in mind, since FOMC news looms ahead, this pattern could continue to develop rather than breakout.

The Game Plan

If the EMD opens the session with a gap out of range and value, we could see a solid unidirectional trending move in the direction of the gap for the first few hours of the day.

However, it is very important that the right opening relationship occur. That is, while the setup is extremely promising, price must open with a gap out of the prior day's price range (or very close) in order for the full effect of the pattern to play out.

Therefore, we'd like to see price open below 1,088.50 or above 1,097.50, as an open of this magnitude would indicate that initiative participants are eager to seek new value. However, If price opens within range and value, this is an indication that price is not ready to see big movement, and instead may lead to further sideways development.

Since the 10-day ADR is 9.9, we'll keep our eyes on the following initial ADR targets: Bull targets of 1,104.3 and 1,106.8; Bear targets of 1,084.5 and 1,082. Adjust these targets once the overnight high and low are recorded.

January 24, 2013

Starwood Hotels & Resorts (HOT) is testing significant resistance, and could be on the verge of a major move ahead. Here's why…

Resistance at $61

The daily chart shows HOT is currently testing a significant area of resistance at the $61 level. As a matter of fact, this level has been resistance for two years, and every test at this level has led to several stern rejections.

In 2012, the average move away from the $61 level was 20%, so we could be on the verge of a similar move very soon.

Also, it's interesting to note that the monthly R2 Floor Pivot sits right at $61.12, providing a solid confluence of resistance. Clearly, a breakout or reversal away from this level could lead to some exciting price action.

Compression

Over the last two years, every reversal away from the $61 level has been swift and sharp, similar to v-bottom reversals.

However, this is not the case this time around, as HOT has been trading within a highly compressed trading range below $61 for the last 15 sessions.
In my opinion, this compression could signal an even bigger move ahead, regardless of direction.

The Range Ratio indicator shows the average 15-day price range is significantly smaller than usual, as evidenced by two consecutive readings below 0.75. Readings below 0.75 usually signal impending breakouts, so watch the outer boundaries of the 15-day trading range for a confirmed move.

For reference, I've marked similar ranges from the last few months that have yielded great results.

The Game Plan

Thursday's bearish Outside Day reversal candlestick pattern hints at a sell-off ahead. However, a break back below the monthly R1 pivot and through the bottom of the 15-day range at $58.95 will confirm selling pressure. Here are the bear targets to watch: $56, $54, and $52.

On the bull side, watch $61.15 for signs of strength. A break beyond this level could spark initiative buying participation, which could pave the way for big strength ahead. Here are the bull targets to watch: $64.50, $65.50, and $66.35.

Keep in mind, price will likely continue to build out within the boundaries of the tight range until a decisive breakout occurs. Be patient, and ready.

Let's see how this one plays out!

The Complete Swing Trading Course

Don't forget, Friday is the last day to order the 3-disc DVD set of The Complete Swing Trading Course, with the chance of receiving two additional live educational trading webinars that complement the training.

I've received an immense response from traders all over the world, so be sure to take advantage of the bonus offer!

January 21, 2013

After a few weeks of range bound activity, the E-Mini NASDAQ 100 seems poised for a major breakout opportunity. Here's why…

Major Compression

The daily chart shows the E-Mini NASDAQ 100 is trading within the boundaries of a highly compressed price range.

As it turns out, this price range actually encompasses the year's trading thus far.
The fact that markets ebb and flow between compression and expansion phases, leads me to believe we'll likely see a breakout from this trading range soon.

As a matter of fact, the Range Ratio calculation shows the current average 10-day price range is vastly tighter than normal (a reading below 0.75), which is usually a precursor to explosive breakouts and range expansion.

Furthermore, the NQ has formed an Inside Day pattern, whereby the last day's price range fell within the price range of the preceding session. This pattern usually leads to breakout opportunities, as well.

Targets to Watch

Regardless of direction, a breakout should yield solid results. As a matter of fact, I'm estimating that a move of around 98.25 points could be seen over the upcoming 10 days.

You see, the current average 10-day price range is 78.50 points. When price breaks free from highly compressed ranges, it tends to move a distance of about 125% of the current average multi-day range (78.50 x 1.25 = 98.25). Of course, this is just a Rule of Thumb, but you'd be surprised how accurate this calculation can be.

With resistance being 2,752, and support being 2,700, we're looking at 10-day targets of 2,850.25 for Bulls and 2,601.75 for Bears. Guess what? The monthly R2 Floor Pivot is sitting at 2,852.25, and the monthly S1 pivot is 2,586.25, which are very close to the MDR calculations above.

Keep in mind, the NQ may continue to churn slowly within the trading range over the next few days. However, once the market sees a worthy catalyst, look for a potentially big breakout opportunity to occur.

December 3, 2012

The E-Mini S&P 400 was rejected at stern resistance for the second consecutive session today, which forecasts additional selling pressure ahead. Here's why..

Strong Resistance

The daily chart of the E-Mini S&P 400 shows price was firmly rejected at the 1,005 resistance level today, leaving a very bearish wick above resistance before closing near two-day lows.

As a matter of fact, the daily bar candle formation that developed as a result of today's trading was the engulfing (or outside day) candlestick, which tends to pinpoint key reversal points in the charts.

The fact that this candle formation occurred at this resistance level is indicative of a potential multi-day decline ahead. It's also not a coincidence that each major E-Mini also formed this highly bearish candlestick.

The 1,005 resistance level has been in play since late September, but also dates back to the March to May highs, as well. Therefore, this "line in the sand" is one to continue to watch.

Unchanged Value Setup

The 15-minute chart shows the EMD has also formed an Unchanged Value relationship. I don't often mention this relationship, but I do introduce the setup in my book Secrets of a Pivot Boss.

Basically, this relationship develops when the upcoming day's value area is virtually unchanged from the prior session's value area. This relationship indicates that current value is holding steady and that buyers and sellers are happy with current value.

However, this pattern also forecasts a potential breakout opportunity ahead, since market participants will eventually seek to push price to new value. That is, the market is happy with current value, but this phase won't last long and will usually lead to a breakout opportunity.

Like the Inside Value relationship, we'll want to see if price can open Tuesday's session with a gap out of range and value. If a gap does indeed occur, and the market maintains the integrity of the gap after the first 15 minutes, we could see a nice unidirectional trend day in the first two hours of the sessions.

Bear Targets

The current average 5-day range is 35.2 points. If we assume that Monday's high price of 1007.6 remains as the high, we can subtract the 35.2 MDR from the high to get a forecasted 5-day range that spans from 972.4 to 1007.6.

October 5, 2012

Research In Motion, Ltd. (RIMM) has been moving lower within a severe downtrend as of late, paving the way for several "sell the rip" opportunities. However, RIMM is currently coiling at resistance, which indicates a breakout is ahead…but which way?

Double Inside Day

The daily chart shows RIMM has formed a Double Inside Day pattern, or ID2. As you may recall, a double inside day pattern forms when the range of the most recent day falls within the prior day's range AND the range from two days ago falls within the range from three sessions ago.

What does this mean? Price is coiling up in anticipation of a breakout with directional conviction.

Of course, it seems the entire market is in a holding pattern until the NFP number comes out, which will likely decide direction and conviction.

Confluence of Resistance

The daily chart shows the ID2 pattern has formed right at 3-month resistance at about $8.40, which also coincides with the monthly R1 Floor pivot.

The fact that this price pattern has formed at this fulcrum means a big move could be ahead, regardless of direction.
You see, an upside break through $8.40 leaves clear air above, while another rejection at this level paves the way for another test at the September lows.

Either way, a substantial move could be seen.
Let the market decide direction, then execute your plan in the path of least resistance.

Let's see how this one plays out!

By the way, I'm hosting a free market outlook webinar after Tuesday's market. It's always fun to talk shop with others that are passionate about the market, so check it out.

October 3, 2012

Apple, Inc. (AAPL) has been incredibly bullish during the current 4-year rally, offering amazing buying opportunities along the way. The current pull-back could be one of those buying opportunities. Here's why...

Floor Pivot Support

Part of the research I conducted for my book Secrets of a Pivot Boss included pivot-trend analysis. One of the components was how price behaved during trending phases.

One key takeaway from my research was clear - in virtually all strong trending markets price rarely closed below the S1 support level, and mostly never even tested it.

Therefore, if the stock you are trading has remained above the S1 support level for consecutive months, it's likely in a strong bull trend, which means you should be looking to buy into weakness along the way.

Buy the dips.

In the daily chart of AAPL, you see price put in a bullish reversal wick just ahead of October's monthly S1 pivot level, meaning this could be the low for the month.

AAPL has only closed below monthly S1 just once in the last 15 months.

Major Confluence

The daily chart also shows Yesterday's bullish reversal wick candlestick also formed at a 3-way confluence zone that includes the monthly S1 pivot, 5-week visual support, and the 50-day simple moving average.

The market tested the waters below the $655.75 visual support zone, but responsive buyers saw value and bought.

Additionally, the 50-period moving average is a spot where many big players have been known to enter the market during clear trends, which was clearly the case this time around.

It's not a coincidence that the reversal wick formed right at the 50sma, it's first test in over two months.

October 1, 2012

The E-Mini NASDAQ 100 was not able to sustain the bullish breakout Monday morning, which led to weakness the rest of the session. Here are five reasons why the NQ is likely headed lower in the days ahead.

1. Rejection at Resistance

Today's intraday rejection at the 2,820 resistance level tells us a lot about where the NQ might be headed in the near term.

The 15-minute chart of the NQ shows price opened the session with initial strength via a gap up and rallied to 2,820 before being rejected at visual resistance and the R2 floor pivot.

Not just rejected…smacked down!

This rejection sent the index into a steady sell-off the rest of the session, which essentially sets up the rest of the reasons on the list.
Which brings us to..

2. Failed Inside Day

While the rejection from above is bearish enough, it is amplified when it occurs on the heals of an Inside Day formation. You see, the Inside Day pattern lends itself to major breakouts and follow-through, which didn't occur Monday.

What does this mean? It means initiative bulls did not take the reigns and advance price higher, which is a HUGE tell for the bears.

The fact that the Inside Day pattern was not enough to fuel strength after the initial push higher is indicative of potential weakness ahead.

3. Bearish Outside Day

The daily chart shows the NQ formed a bearish outside day pattern after Monday's session. An outside day pattern develops when the current session's range engulfs the prior day's range.

What makes this outside day pattern more significant is the fact that it opened below the prior day's low, rallied to create a new high above the prior day's high, and then closed back below Friday's low.

Essentially, this price behavior formed a very bearish reversal wick candlestick, which further signifies weakness ahead.

4. Rounded Top

The daily chart also shows that price is currently developing a rounded top pattern, which has been forming over the last four to six weeks.

This type of pattern usually precedes weakness, especially if the NQ remains below the 2,825 level that rejected its advances Monday morning.

5. VPOC at 2,715

Given all of the bearish cues, we'll keep our eye on the 2,715 level as the near term target ahead. Why? Because it's the composite volume profile's Volume Point of Control, which tends to behave as a magnet.

The daily chart shows the 177-day volume profile, which clearly shows the 2,715 level. If price does indeed push lower, look for VPOC to serve as a target for bears looking to cash in on the positions.

The good news? The NQ has trended higher recently, which makes any pull-back to VPOC a buying opportunity. Look for buyers to enter the market 2,715 should a test occur.

If not, we could see tests at 2,670 and 2,635 ahead.

And don't forget, if you buy my book in October, you'll receive a free live webinar by yours truly in November! Read more...

September 25, 2012

Now that the Dow Jones ($DJI) got the breakout from the narrow price range we forecasted in our Monday analysis, here's how we'll be playing a potential down move Wednesday.

The Breakout

In Monday's analysis titled Watch the Dow for a Breakout, I wrote that price was coiling for a potential breakout opportunity that could spark the next short term move.

As it turns out, the Dow got a solid downside break through the bottom of the 7-day range at 13,500, which paved the way to a 101-point loss on the day.

The downside break indicates price could be headed to the 13,320 bear target I forecasted in my analysis within 3 to 5 days.
Today's Outside Day candlestick pattern further confirms weakness ahead.

Lower Value

Today's downside move, combined with the potential for more downtrending behavior ahead, opens the door to one of my favorite setups - the Lower Value setup.

The 15-minute chart shows the Dow has formed a 2-day Lower Value relationship using the Pivot Range indicator.

The Lower Value relationship develops when the upcoming day's pivot range forms completely lower than the prior day's pivot range. In essence, this relationship indicates continued weakness ahead, especially if Wednesday's Open price confirms the setup.

This is the kind of setup that you can play over and over during a well-behaved trending market.

The Game Plan

If you missed today's move, here's how you can approach tomorrow's market to grab a piece of the action.

Since we have a Lower Value relationship, I'll be looking to sell into any modest strength tomorrow morning, with the intention of riding price to new lows within the current near-term decline, especially if price remains beneath the support-turned-resistance level of 13,520.

If price opens the session below 13,480, look to sell into strength between 13,485 and 13,515. However, if price opens the session above 13,500, look to sell into strength between 13,515 and 13, 540. Look to scale out of your position at the following targets: 13,465, 13,405, and 13,355.

If the $DJI opens the session above 13,540, then market sentiment has clearly shifted and likely means strength ahead. Keep this contingency in mind.

August 9, 2012

The Dow Jones Industrial Average appears poised for a major breakout opportunity in the days ahead. Here's the pattern to watch..

Double Inside Day

The daily chart of the Dow Jones Industrial Average ($DJI) clearly shows the index has experienced several days of range compression. A major breakout is usually the result of this type of behavior, so keep an eye on the Dow in the days ahead.

As a matter of fact, the Dow has formed a fairly rare price pattern that has a huge success rate - the Double Inside Bar (DIB) price pattern (also Double Inside Day or ID2). This pattern forms when the current day's price range falls within the range of the prior session AND the price range of the prior day falls within the range from two days ago.

Essentially, it's a day within a day within a day.

When this pattern develops, a major breakout usually follows. Keep an eye on the recent high (13,200) and low (13,125) for signs of an early breakout opportunity ahead.

Camarilla Pivots

The daily chart also shows the Dow is currently sitting just beneath the monthly H3 Camarilla pivot point (red line), which is typically bearish. If price cannot rise above the H3 pivot at 13,185, we could see a push back toward the L3 pivot at 12,835 soon, especially if a downside break from the DIB pattern occurs.

As you can see, price has honored the monthly Camarilla pivots quite well since June. You'll notice the monthly L3 Camarilla pivot (green line) has been a great zone for buy signals during the recent bull trend.

Keep an eye on the DIB pattern, as a breakout will dictate whether we see L3 at 12,835 or H4 at 13,357 in the days ahead.

Range Clues

The current 3-day price range in the Dow is just 100 points. By contrast, the 5-period 3-day average is 262 points. This means the Dow is clearly coiling for its next major move and a solid breakout could be around the bend.

February 17, 2012

Positive results of an investment portfolio are a function of being positioned in the correct direction of the general market. This may seem like an oversimplification but most investors have a difficult time analyzing which direction the general direction of the market indexes. The majority of investors participate in a market uptrend well after the uptrend has been established. Most investors remain in positions, that are going down, well past the time it was appropriate to sell. Many investors have a difficult time maintaining a position that is profitable because of the fear of giving back profits. Fortunately, candlestick analysis has some basic elements built into each individual candlestick signal that greatly alleviates the guesswork of which direction the market is going to move.

The first two months of 2012 have shown a steady uptrend. Friday's trading, February 10, revealed a severe pullback in the Dow. Reversals of a trend are easily identified with candlestick signals. However, there are indicators that help confirm or non-confirm a trend reversal. The eight exponential moving- average, the T line, provides a very high probability trend indicator. Combining candlestick signals with the T line creates a high probability trend evaluation tool. Upon seeing a candlestick buy signal AND a close above the T line produces a very accurate trend axiom. An uptrend will remain in progress until the appearance of a candlestick ‘sell’ signal AND a close back below the T line. This simple trading rule allows an investor to comfortably maintain stock positions even when the candlestick signals produce “possible” reversal situations. Until a candlestick reversal signals are confirmed with a close below the T line, the uptrend has to be considered still in progress.

November 20, 2011

I went to the Traders Expo in Las Vegas last week. While walking the floor of the show and talking to traders, I was amazed at the number of people who were looking for a new trading technique because the one they were using was ‘not producing results’ during the last few weeks. There were a lot of slick presentations on trading, but few contained any real data indicating how the system actually performed, or how the results varied by market condition. Trading a tool based on just a few examples is a good way to drain an account. Most of these people only had one trading tool, either focused on stocks or ETFs, and did not trade both. They had no idea how their trading tool performed in different market conditions. They had no idea of how to adapt to the market conditions instead of complaining about them.

Trading the same tool constantly in all market conditions is a good way to drain an account. Moving blindly from one tool to another is also a good way to drain an account. Since stock and ETF trades often work in different timeframes; I have found that trading both is an advantage to me, and lets me participate in both short term and intermediate term movements. Understanding the current market conditions and having that information drive the selection of trading tools, number of positions traded, and position sizing, is one of the keys to success. It takes some time and effort to learn this. The ‘traders’ that are looking for a simple indicator or magic tool that will lead them to riches are asking for trouble.

There are no magic tools. If there were tools that required no effort to learn, and always worked, then everyone would be rich. Trading, like other professions, requires some time, effort, and expense, in order to develop the skills. None of the people complaining about the recent market environment had used that information to adjust their trading styles. In my case, I have been standing aside for a couple weeks as the market has shown unusual volatility in a tight trading range. Both of those conditions are caution signs, and together indicate it is best to sit tight and focus on protecting previous profits until the market picks a direction; which it will when it is ready. None of the people complaining about the market environment and the results of their trading were sitting tight (as the recent conditions called for). They felt that since they were traders they should be trading. When I suggested they should be focused on generating profits, not trades, and the recent environment had the odds stacked against them they were very quiet except for a couple that argued they had to be trading in order to have the opportunity to make profits. I quoted a Kenny Rogers song and told them that successful traders need to ‘know when to hold them and know when to fold them’. Sometimes the best, and most profitable, strategy is to stand aside for a week or so and let the market sort itself out. Traders need to have studied their trading tools and market conditions to know which tool is most likely to be appropriate for the current market conditions.

Trading should be data driven, not based on emotion, whishful thinking, or hot tips from TV hosts. To be data driven one needs to test and analyze trading tools and find out what really works, and when each tool should be used. Traders must understand which tool to use for a specific task, and have a clear understanding of how the tool works, and what can and cannot be done with it. I have extensively tested several trading systems, the results of this testing on specific trading trading tools are outlined in ‘How to Take Money from the Markets’, and Money-Making Candlestick Patterns. The testing process helps us understand how stocks usually behave after forming a specific pattern such as being outside the Bollinger Bands, showing strong distribution or accumulation, or pulling back or retracing during a trend. Understanding what a stock is most likely to do forms the beginning of a trading strategy. Trading without this information is taking unknown risks.

September 21, 2011

The Traders' Library Hall of Fame Award recognizes the accomplishments of an exceptional trader and educator. The winner has always been someone who has helped grow the industry through their dedication and commitment to the education of traders. We realize that our business wouldn't exist if it wasn't for the hard work and dedication of the recipients of this award as well as the many others who have gone before us, work beside us, and continue to grow this industry.

On October 22, Traders' Library will honor Steve Nison with the Hall of Fame award with a luncheon at the Traders' Library Trading Forum in Denver, Colorado. With a keynote address from Toni Turner, this is a do-not-miss event for traders everywhere.

Steve's sold out seminars have been hailed as the most valuable and entertaining in the industry. Join us the weekend of October 21-23 for three days of trading excitement and more than a dozen educational seminars, including 90 minutes with Steve Nison himself.

September 8, 2011

When trader and blog reader Andy posted the following question in response to this post, I turned right to the author of Trading Full Circle for some answers...and maybe a little tough love :)

Question from Andy: Hi, I'm a day trader, trading index futures. I use 5-minute candle charts for identifying setups, and 1-minute charts for my entry triggers. I enter into 2-part positions, with a stop-loss of 7 to 10 points. The typical profit target is 12 to 20 points for the first part and 25 to 30 points for the second part. I mostly get the entries right and almost never get stopped out right away. When I do get stopped out, the price has usually moved 8 or 12 points in my favour (which is about 1.5x times my stop) and then reversed to take me out. So I find that overall, I am hardly making any money at all despite making good entries, and almost all my trades initially being in profits. So when the price has moved in my direction (but not yet reached my first target) I face this gut-wrenching dilemma:1. Should I aggressively move the stop loss to breakeven before it technically makes sense to do so, so that I don’t “let a winning position turn into a loser”? OR 2. Should I trail my stop behind the significant candles (which makes sense technically) but risk getting stopped out for a full loss despite having been in profits of up to 1.5 times my stop? OR 3. Seeing the way many of my trades pan out, should I turn into a scalper and pocket 8 to 10 points on almost every trade, without gloating over the money I could have made had I waited for the eventual targets?Please help. Thanks.

Answer from Jea Yu: One of the mistakes you are making is the assumption of static expected price gains. When someone tells me I usually use X point price target and X price stop, it assumes that every trade you make falls into the EXACT SAME pattern set-up and market context. Otherwise, this doesn't make sense. Your expected ranges are TOO BIG for a 5-minute chart alone. Remember, the CONTEXT is one of the most important factors. For a 5-minute and 1-minute chart based trade, you are way overestimating how many points you should get. The market will go through trending phases, oscillation phases, and chopping phases. When you get 8 to 12 points, you need to SCALP OUT the position or SCALE IT DOWN to the most minimal contracts and raise your trail stop. Use the stochastics oscillators for power uptick formations to confirm and then 1-minute for entry and exits. Even though you may not use a 15-, 60-minute, or daily chart, it always helps to have them up so that you can see the context in which the 5-minute chart is moving in. A 60 minute downtrend would mean the 5-minute up move will be LIMITED as your long trade is a counter trend play against the larger downtrend. This is likely one of the reasons why you get stopped out. There is NO REASON to ever let the ES move even 5 points up without taking profits off the table. Use the wider time frames so you know your playing field. We trade the SPY every day and always gauge the daily, 60, 15, 5, and 1-minute charts intra-day to get the full context. It is usually just a game of pinball where each bumper gets tested and breaks or reverses back to trend support. Also, use a momentum indicator like the slow stochastics so that you have a visual that shows you that the move is exhausting out. I have a pattern called the "mini pup" which is a very strong continuation trigger. Here's a short video explaining it: http://www.youtube.com/watch?v=TEsN2a-msBw&feature=related

Try to sell longs through the 80 band stochastics and the 1-minute upper Bollinger bands and vice versa on shorts with the 20 band and 1-minute lower bbs. Lastly, please make sure you know if you are playing counter trend or with the trend as it pertains to the 15, 60-minute, and daily charts.